If gold were to make a New Year’s resolution, it would be simple: Do better in 2014.
The precious metal finished 2013 down about 28 per cent, its biggest annual drop in more than three decades. Its fall from grace after years of spectacular gains dragged down both mining stocks and investors lured by gold’s supposed power as a hedge against economic calamity.
More pain may be in store. With the global economy poised to pick up speed, few observers see much chance in the year ahead for gold to rise substantially above its current levels around $1,200 (U.S.) per ounce.
“Investors' love affair with gold has come to a bitter end,” said John Stephenson, a portfolio manager with First Asset Investment Management Inc. and author of The Little Book of Commodity Investing. “Gold, one of the worst performing assets in 2013, will continue its slump in 2014.”
That is a far cry from the attitude in 2008, when the global economy was teetering on the edge of recession and investors feared an outbreak of inflation because of central banks’ easy-money policies. Back then, gold appeared to be an ideal haven for investors looking for an asset that historically has done well in times of economic turmoil. The metal’s price more than doubled after the last recession, hitting an record high of $1,920 in September 2011.
It has been downhill ever since. The precious metal hit a three-year low of $1,180 in June, after the U.S. Federal Reserve announced it would begin tapering its bond-buying program, which many investors interpreted as a sign of increased confidence in the economy. Bullion ended the year at $1,202.
Investors buoyed by the prospects of a global economic recovery have turned their attention to banks and technology stocks, helping the S&P 500 climb almost 30 per cent in 2013. In stark contrast, shares of gold miners have lost more than half their value over the past 12 months.
The price of the precious metal has always depended on market sentiment, since unlike stocks or bonds it doesn’t deliver dividends or interest payments to keep investors loyal. But the introduction in recent years of exchange-traded funds that hold gold may be making the metal even more volatile. Investors can now buy or sell it with the click of a computer key – unlike past decades when they had to trade coins or ingots.
As bond yields tick higher and stock markets climb to new peaks, many investors have deserted to rival assets that seem to offer better chances of gains. “Gold offers no yield and that’s in a world where equities are returning nine-to-30-per cent,” said Mr. Stephenson, who expects gold to fall below $1,000 over the next 12 months.
Not everyone agrees. While Sprott Asset Management LP, Canada’s best known precious metals investor, took huge hits in 2013 as a result of gold’s fall, Eric Sprott, its chief executive continues to predict gold will hit $2,400 by next summer. He says there is a “massive imbalance” between supply and demand that’s not reflected in current prices.
Most forecasters, though, see the metal advancing only slightly from its present levels.
“I think we may have seen the low for gold now,” said Patricia Mohr, vice-president and commodities expert at ScotiaCapital, who is forecasting gold to average $1,270 an ounce in 2014. “I wouldn’t anticipate a huge recovery in 2014. The bigger recovery will be in the middle of the decade.”
If gold remains at current levels it will mean more tough calls for mining companies that have already written down their assets by billions of dollars and shelved projects as a result of gold’s slump.
At a gold price around $1,250, “producer balance sheets are relatively stable,” given the cost reductions that miners have already achieved, TD Securities analyst Greg Barnes said in a recent note.
There will be problems, however, if the metal breaks below that point. A drop to $1,100 would put more highly leveraged companies such as Barrick Gold Corp., Newmont Mining Corp., and Detour Gold Corp. at risk, said Mr. Barnes.
“We continue to prefer companies with strong balance sheets in the current gold price environment,” he said, citing as his top picks such companies as Eldorado Gold Corp., Goldcorp Inc., and B2Gold Corp.
Gold stocks may stage a modest recovery in the months ahead simply because they have become so cheap, says Christopher Foster, portfolio manager at Blackheath Fund Management Inc.
While he tends to avoid buying gold stocks for his clients these days, Mr. Foster believes many stocks in the sector are now oversold. “I think there is a chance here for gold stocks to outperform gold,” he said.